Digital Currency Fraud 101: The Pump and Dump Scheme

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One of the most unique things about the digital currency industry we've noticed—in comparison to the trading of traditional stocks and commodities—is a lot of the people who invest in alternative currencies are attracted to its unique features, and are new to investing and trading in an exchange setting. There's nothing that says you have to be a financial genius to invest in alternative currency, and the basics of the market are easy enough to learn.

Coin Pursuit takes pride in being the most comprehensive and educational resource about cryptocurrency on the web. We 're also devoted to being a helping hand and source of advice for the new investor; for example, our glossary is there to help people learn and apply the lingo that's unique to the field. As an extension of that philosophy, we'd like to take some time here to point out one of the traps that often catch new investors off-guard. Ladies and gentlemen, we present to you the “pump and dump” scheme.

The essentials of this type of scheme are as follows: an unscrupulous investor buys a large amount of a stock or commodity (in this case, a type of digital currency) at as low a price as possible. Once they've amassed a lot of that currency, they start to manipulate the market by making claims and disseminating information (thus “pumping” the market) that will hopefully convince other investors to buy the currency in question. If enough investors believe this information—which for the most part is misinformation—the price of the currency will begin to rise. The investor who instigated the pump and dump scheme—knowing fully well the inflation of the market is based upon false information—will wait for the price to rise high enough to assure a healthy profit. At that point, they'll sell their digital currency off at that higher price—that's the “dump” part of the scheme. Shortly after this happens, the price of the currency inevitably falls—and the investors who fell for the scheme find out they have purchased currency at a falsely-inflated price.

It should come as no surprise that pump and dump schemes are illegal; they're nothing more than market manipulation based on false information. They've been around as long as stock and commodity exchanges have been, but the Internet makes them easier to carry out. There are many online outlets for investors to use as a platform for them to discuss topics and trends in real time; however, it's also where pump and dump schemers spread their false information. They can manipulate the market much more quickly, affecting a sizable price change in hours or days instead of weeks or months.

“Well, that's just great,” you might say. “So how do I avoid pump and dump schemes?” The United States Securities and Exchange Commission (SEC) has a page of their website devoted to these scams, and a comprehensive list of tips for investors to consider. Ultimately, their advice boils down to some simple common-sense advice. It's a lot like receiving an email with an attachment or link. Unless you know the source of the message—and trust them completely—you're not gonna open the attachment or click on the link, because doing so could potentially download a virus or other malware onto your computer. Reacting to a possible pump and dump scheme works on the same principle. If you don't know and trust the source of the information, ignore it. Research the source of the “hot tip,” and verify it with someone who knows more about the market than you do—the forums on digital currency exchanges and other sites (like Coin Pursuit) are a great place to seek this advice.

P.T. Barnum is credited with saying, “There's a sucker born every minute.” This information is being presented to our readers so none of you will be that sucker. With what you've learned here, you'll be able to spot and avoid pump and dump schemes.

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